AMP Limited's (ASX: AMP) share price has declined by 35% in the last decade. It lags the performance of financial services peers such as Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ). They have risen by 66% and 1% respectively. However, AMP could post positive returns in the next decade for these two reasons.
Strategy
AMP is well-placed to capitalise on the growth in demand for financial products and services across Asia. For example, it owns a 19.99% stake in China Life Pension Company (CLPC), as well as a 15% stake in China Life AMP Asset Management (CLAMP). The latter launched 19 new mutual funds in the last financial year and now manages $14.8 billion in assets under management for Chinese retail and institutional investors. CLPC is the biggest provider of trustee services and second largest provider of investment management services in China.
Average wages in China are forecast to rise from the current 62,000 Yuan per year to over 90,000 Yuan per year within the next four years. Further, the retirement age in China is expected to remain at 60 for men and 50 for women in 2020. Financial products and services take-up remains relatively low, which provides an opportunity over the long term for AMP.
Alongside this, AMP has invested in improving customer loyalty. Its digital strategy provides greater choice for customers as well as cross-selling opportunities. Further, AMP has invested in customer experience improvements including new call centre technology which could improve recurring revenue.
Financial strength
AMP's financial position reduces its long term risk profile. As at 31 December 2015 it held $2.5 billion in capital above the minimum regulatory requirement. This was an increase of 28% on the previous year and provides a greater cushion against unexpected losses. Further, its cost/income ratio improved by 1 percentage point to 43.8%, which provides evidence that AMP is becoming a more efficient business.
In addition, AMP's finances have benefitted from a cost cutting and efficiency programme. It has invested $320 million in a cost saving programme in order to achieve $200 million in pre-tax recurring run rate cost savings by the end of the current financial year.
AMP's financial strength has allowed it to increase its dividend payout ratio. It will now occupy a range between 70% and 90% of underlying profit. This means that in the 2017 financial year AMP is forecast to yield 5.5% at its current share price. This is 130 basis points higher than the ASX's current dividend yield.
Alongside its sound strategy, AMP's improving finances mean that its long term total return prospects are very bright.
